Here are six ways the rich save big on taxes, from putting mansions in trusts to guaranteeing inheritance for future generations

  • The wealthiest taxpayers have many tools at their disposal to pay less to Uncle Sam.
  • Some tactics, like donating to charity via trusts, might seem far-fetched but are perfectly legal.
  • Lawyers and bankers to the ultra-rich told Insider how these rarified techniques work.

Americans can give or pass on nearly $13 million in assets without paying federal estate tax thanks to tax cuts enacted during the Trump administration. This tax affects only 0.2% of taxpayers, and they hire top-tier accountants and lawyers to pay as little as possible.

“This is a wealthy person’s playground problem,” said Robert Strauss, a partner at law firm Weinstock Manion.

Some of these tax avoidance strategies may raise eyebrows, but they are perfectly legal. For example, taxpayers can place their homes and country homes in trusts that last decades, and any appreciation in the value of the property does not count toward their taxable estate. Life insurance, perhaps the least exciting aspect of financial planning, can be used to save tens of millions of dollars in taxes if purchased from Cayman Islands and Bermuda issuers.

As the Trump tax cuts expire, estate planning will kick into high gear over the next two years. Individuals and married couples can currently gift or bequeath $12.92 million and $25.84 million, respectively, before the federal estate tax of 40% kicks in. However, unless further legislation is passed, that exemption will be cut in half by the end of 2025.

Here are six little-known techniques that the richest taxpayers use to pay less to Uncle Sam:

Using trusts to give away homes and country houses

QPRTs, or qualified personal residence trusts, effectively freeze the value of a real estate property for tax purposes. The homeowner transfers ownership of their primary residence or vacation home to the trust and retains ownership for however many years they desire. When the trust expires, the property is removed from the taxable estate. Even if the home has appreciated in value by millions of dollars, the estate only has to pay gift tax on the value of the property when the trust was formed.

QPRTs have grown in popularity in the last year as interest rate increases provide another tax benefit. It appears to be too good to be true, but there are some conditions.

Passing wealth to future generations with trusts that last up to 1,000 years

Some of America’s wealthiest use generation-skipping trusts to avoid paying wealth transfer taxes and provide for future heirs, from the Wrigley family behind the titular chewing gum brand to Jeff Bezos’ mother, an Amazon investor.

These so-called dynasty trusts allow taxpayers to pass wealth down to future generations while only paying the 40% generation-skipping tax once. Many states have relaxed trust limits in order to attract wealthy clients, with Florida and Wyoming allowing dynasty trusts to last up to 1,000 years, or roughly 40 generations.

The heirs have lifetime rights to the trust’s income and real estate rather than ownership of the trust assets. These trusts can even shield assets from future creditors and protect them during a divorce.

Here’s how these centuries-old trusts work, and why even long-time lawyers have trouble understanding them.

Giving to charity via trusts

CRTs (charitable remainder trusts) enable wealthy Americans to have their cake and eat it too.

Many wealthy taxpayers deduct charitable contributions from their taxable income, but the ultra-rich can turn their philanthropy into lifetime income.

Taxpayers place assets in the trust, receive annual payments for the rest of their lives, and receive a tax break. To satisfy the IRS, only 10% of what remains in the CRT must be donated to a designated charity.

These trusts can be funded with a variety of assets, ranging from yachts to closely held businesses, making them especially useful for entrepreneurs looking to cash out while doing good.

Taking loans to pay estate taxes

This technique, unlike QPRTs and CRTs, is heavily scrutinized by the IRS and comes with numerous hoops to jump through.

Families with a lot of assets but not much cash can either sell them quickly to meet the nine-month deadline or take out a loan.

The estate can deduct the interest on these Graegin loans, which are named after a Tax Court case from 1988. In addition, if illiquid assets account for at least 35% of the estate’s value, families can defer estate tax for up to 14 years by paying in installments with interest and effectively borrowing from the government.

Auditors have targeted Graegin loans, which have resulted in years-long legal battles, but the savings can be worthwhile for wealthy families.

Buying offshore life insurance policies

Private-placement life insurance, or PPLI, can be used to pass assets to heirs, ranging from stocks to yachts, without incurring estate tax.

In a nutshell, an attorney creates a trust for a wealthy client. The trust owns the offshore-created life insurance policy. The assets in the trust are treated as premiums, and if properly structured, the benefit and assets in the policy are tax-free.

It is only relevant to the ultra-rich, often requiring $5 million in upfront premiums as well as a small army of professionals to set up and administer, such as trust and estate attorneys, asset managers, custodians, and tax advisors.

Rich Americans have avoided nearly every tax reform proposed by Biden, but Senator Ron Wyden says he is looking into PPLI and the industry’s leaders, including Blackstone-owned wealth manager Lombard International.

Transferring depressed assets during a market slump

For high-net-worth individuals, the downturn has one silver lining. It is an excellent time to establish new trusts because people can transfer depressed assets, whether stocks or bitcoin, at a lower tax basis.

During a recession, the long-favored grantor-retained annuity trusts (GRATs) can provide significant tax savings. During the trust term, which is usually two years, these trusts pay a fixed annuity, and any appreciation in the value of the assets is not subject to estate tax.

GRATs have gained popularity in recent years as the Federal Reserve has raised interest rates, reducing the returns on these trusts.

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